Up nearly 28% so far this year, Scripps shares (ticker: SNI) have handily outperformed the stellar returns of the S&P 500. It's been delivering financial results that routinely eclipse the expectations of Wall Street: In three of the past four quarters, Scripps has exceeded forecasts. For the latest quarter ended June 30, the Knoxville, Tenn.-based company posted net income of $160 million, or $1.08 a share, on revenue that rose 11% to $665 million. That compares with net income of $142 million, or 93 cents a share, in the year-earlier period on revenue of $601 million. Street analysts were anticipating net income of $1.05 a share.

The media company and its stock are clear winners in an improving economy that's rekindled consumer desires. Scripps' popular flagship HGTV, which focuses on home sales and renovations, posted a 13% gain in revenue on record levels of viewership, while revenue at the Travel Channel rose 14%. Only the Food Network lagged, with revenue up a mere 2.8%.

For the second year running, Scripps led all cable networks in "upfronts," ad commitments made in advance of a new season. Scripps, which owns most of its content, booked more than $1 billion this year and last. The spot ad market is strong, too, with prices up by mid- to high-single digits year over year. Affiliate fees rose 11%.

The growing ad sales and affiliate appeal are a testament to Scripps' powerful brands and strong lineup of shows–including House Hunters International, Love It or List It, and Cutthroat Kitchen–featuring personal stories about living abroad, renovating a home, and cooking. The programs attract a demographic group that advertisers love, affluent and aspirational women. Scripps now sees full-year 2013 revenue up 9% to 10%, to $2.54 billion, from a previous 7% to 9%, because of the strong advertising climate.

"We believe it has an undervalued and underappreciated franchise," says Amy Yong, an analyst at Macquarie Research, who has a price target of $85 a share, about 15% higher, based on a multiple of 20 times her 2014 earnings estimate of $4.24 a share. The shares now trade under 18 times consensus 2014 estimates of $598 million, or $4.20 a share.
Discovery Communications
(DISCA), the media outfit most similar to Scripps, trades above 19 times 2014 earnings.

Moreover, Yong sees other potential catalysts for further stock-price gains. For instance, if Scripps were to buy the 31% of the Food Network that it doesn't already own from
Tribune
(TRBAA), that could add 15% to Scripps' earnings. Such a deal makes more sense now since Tribune, which is planning to spin off its publishing assets and transform itself into a television broadcasting company, could use the cash that it would bring. In July, Tribune agreed to pay $2.7 billion for 19 local TV stations across the U.S. Scripps is the only logical buyer of the Tribune stake, though it has said it won't overpay.

Scripps could get a lift from a continued turnaround at its Travel Channel, which is regaining traction after Anthony Bourdain, host of the popular No Reservations program, left for CNN last fall. Ratings could also improve at the Food Network, which faces tougher competition.

EXPANSION OVERSEAS IS a strategic priority, opening up new markets for distribution and advertising and supporting double-digit growth in cash flows, another potential catalyst for a higher stock price. Scripps, led by Chief Executive Kenneth Lowe, who created HGTV, has set a long-term goal of generating 10%-15% of cash flow from abroad. Lowe was not available for comment. This year, Scripps has acquired the Singapore's Asian Food Channel, the leading food-focused cable network in the region, after buying the U.K.-based Travel Channel International last year.

At a Glance

SCRIPPS NETWORK / SNI

Recent Price

$74.07

Rev 2013E (bil)

$2.54

EPS 2013E

$3.70

EPS 2014E

$4.20

P/E 2014E

17.6

EV/Ebitda 2014E

10.0

E=Estimate. EV=Enterprise value.

Source: Bloomberg

Added inducements for investors include the financial wherewithal for more share repurchases (it still has $650 million left under a $1 billion authorization), more acquisitions, and a higher dividend (the yield is less than 1%). Scripps is considered underleveraged, with its net debt at one times Ebitda compared with multiples of 2.5 and three times at other major media companies.

Echoing Yong's bullish views is James Tarkenton, a co-portfolio manager at Lateef Investment Management in Greenbrae, Calif. He has a $90 stock price target, using a multiple of 12 times 2014's enterprise value/Ebitda, or earnings before interest, taxes, depreciation, and amortization. Media companies typically trade at 14-15 times while Scripps is now valued at 10 times 2014 EV/Ebitda.

"The opportunity to buy this media company at 10 times (EV/Ebitda) is a very attractive one," says Tarkenton.

The Bottom Line

Scripps' shares could climb as much as 30% based on its strong fundamentals and growth prospects, both in the U.S. and abroad.

The question for Barry Lucas, a media analyst at Gabelli who puts a private-market value of $98-$100 on Scripps, is, "Why is it still public?" Since being spun out of E.W. Scripps in 2008, Scripps Networks, its original content, and its attractive viewer base have been seen as a tempting target for a bigger media company. With a market value of $11 billion, it could easily be digested by, say,
Walt Disneydis -0.02499375156210947%Walt Disney Co.U.S.: NYSEUSD120
-0.03-0.02499375156210947%
/Date(1438376511716-0500)/
Volume (Delayed 15m)
:
5450467AFTER HOURSUSD120.08
0.080.06666666666666667%
Volume (Delayed 15m)
:
316813
P/E Ratio
25.862068965517242Market Cap
203611318359.375
Dividend Yield
1.1% Rev. per Employee
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